3 ways banking and finance could fade in 2022


Fabrizio Burlando is executive vice president of consulting and innovation at Mastercard.

The distinction between the terms banking and finance has never been clear. It’s not necessary.

Banking services are specific types of financial services. Yet even the relatively secure definition of a bank is changing.

Take a bank as an approved depository institution. Central Bank Digital Currencies (CBDCs) are redefining the notion of a bank account. Definitions of banks as providers of payment or credit services are also not very helpful. Regulations such as the European Union’s Payment Services Directive (PSD) officially shook up the payments space some time ago, and many buy-it-now, pay-later (BNPL) providers now offer credits in all but name.

Go a step further and caveats emerge: CBDCs are generally not designed to disintermediate banks. Licenses covering money services businesses are not comparable to banking licenses. And BNPL only covers small, short-term loans at or near the point of sale. Yet, when it comes to basic perception, banks no longer represent the same thing.

The change is not just about traditional banking. Last year, open banking has become more and more bank. It continues to ring true. But there is a caveat: the banking side was changing too – and open finance stole the show. Today, the term bank-as-a-service, centered on banking, which fully encompassed open banking, is replaced by the more neutral term integrated finance.

There are three ways banking and finance could still fade in 2022:

CBDCs are redefining “accounts”

The Bank of England recently announced that a UK CBDC would not be feasible until the second half of the decade. Going by the UK’s position, CBDCs won’t be ubiquitous anytime soon. Yet this also means that they are seriously considered. And caution in some quarters hasn’t stopped the Bahamas, the Eastern Caribbean Currency Union and Nigeria from already launching CBDCs. China also hasn’t been shy about extensively testing its e-CNY, or digital yuan, in preparation for nationwide rollout.

The specific motivations of CBDCs range from domestic policy issues, such as financial inclusion, to improving international settlements, which are explored by the Bank for International Settlements in conjunction with several central banks. A common motivation is to modernize cash in an increasingly digital world. But unlike the digital representations of cash that sit in bank accounts around the world, CBDCs replace cash that can be held in “accounts” directly backed by central banks.

The general objective is not to disintermediate the banks. Consensus is emerging around a two-tier approach in which commercial banks act as intermediaries, providing account management and payment initiation services to customers’ CBDC wallet accounts on behalf of central banks. Some movement of funds from traditional bank accounts is probably unavoidable. One way to mitigate the impact will be to place limits on individual CBDC holdings. For example, in their discussions of the possibility of creating a digital euro, policymakers at the European Central Bank suggested capping individual accounts at €3,000.

Open finance is more than open banking with a broader reach

Open finance goes beyond open banking payment accounts to include savings accounts, mortgages, pensions, insurance, loans, investments, and stocks. But including financial services in the scope of open banking regulation does not automatically lead to open finance.

While open banking focuses on the ability of individual application programming interfaces (APIs) to connect through shared frameworks to deliver financial services, open finance takes those financial services and also connects them through shared frameworks.

Existing payment request services, messaging systems that allow recipients to send payment requests to payers independent of the banking app and with all payment information pre-confirmed, are already approaching open funding. Although independent of open banking, they thrive on push payments made possible by open banking’s transaction initiation services. Their shared frameworks combine the same functionality into otherwise independent transactions.

An example of open finance in its own right is the emerging UK use of variable recurring payments (VRP) to sweep money between financial accounts without the need for repeated customer authentication. VRPs take pre-confirmed account details, ranging from mortgages to pensions, and automatically sweep the cash to improve liquidity when predefined triggers, such as meeting a balance threshold, are met. Chimney sweeping is carried out at the request of customers, who can revoke their authorization at any time. The growth of super apps, which provide multiple financial services in one place, will increasingly depend on this unified cross-industry functionality.

BNPL is more than its name suggests

This year, one of BNPL’s largest providers began offering bank accounts to select customers in select locations. It’s a big step, but BNPL providers have been encroaching on banking territory outside of payments for some time. The most obvious is the provision of credit. BNPL’s vendors didn’t sidestep the issue so much as they positioned BNPL differently as a compelling, uninspiring alternative. Either way, it’s still a form of credit, even if it’s provided at or near the point of sale for a relatively small purchase.

However, BNPL represents more than its name suggests. From one perspective, these interest-free payments could be considered a form of immediate cash back in a rewards program, as consumers receive monetary incentives. And their associated markets with special offers are a new kind of rewards catalog. These rewards aren’t mere perks anymore, either. Rather, it is a form of financial management in an era where personal financial management tools are transforming the space through open finance.

The expansion of many BNPL providers beyond their core payout offering partly reflects the company’s ambition. But it also often reflects necessity as margins erode in a land grab based on who can sign up the most retailers. A more comfortable alternative is to join the open-loop networks of the BNPL. Without having to build the ecosystem from scratch, BNPL providers can turn their attention to other matters. As remittances become more commonplace, the opportunity will be less about the actual payments and more about the financial services that accompany them. Banking license or not, the BNPL space will soon mean more than just buy now and pay later.

It is in these supporting spaces – whether through CBDCs, open finance or BNPL – that the bank evolves through its interaction with financial services. And where banks once overlapped with other financial service providers, there are now relationships instead.


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